Sharia-compliant staking through Luno

Cryptocurrency staking may seem similar to conventional fixed deposit accounts at conventional banks, which raises legitimate concerns about Shariah compliance, particularly regarding the prohibition of riba’ (interest). In this article, we outline how staking is fundamentally different from fixed deposits, and how you can stake your crypto through Luno in a way that aligns with your values. 

Why conventional fixed deposits are not Shariah compliant

When a person deposits money into a conventional fixed deposit account, they are essentially lending their money to the bank under the contract of qard (loan). The bank then uses this money for various purposes and pays the depositor interest in return. This interest payment constitutes riba’, which is explicitly prohibited in Islamic finance.

What is the difference between staking and fixed deposits?

While staking may resemble fixed deposits, both involve depositing assets and receiving returns, but there are several fundamental differences between them:

Tokens vs. currency

The most significant distinction lies in what is being deposited. In staking, participants deposit digital tokens, not money. According to the Shariah Advisory Council of the Securities Commission Malaysia (SAC SC), in its 233rd Meeting on 29 June 2020 and 234th Meeting on 20 July 2020, digital currencies and tokens are classified as urudh (commodities or goods), not nuqud (currencies).

This classification is crucial as it changes the nature of the transaction. However, it is important to note that digital currencies or tokens backed by ribawi items (interest-bearing assets) must comply with bay’ al-sarf (exchange of currency) rulings.

Nature of the activity

The fundamental activity in staking differs significantly from conventional fixed deposits.

Fixed deposits

Depositors lend their money to the bank, which borrows it and pays interest in return. The relationship is one of debtor and creditor.

Staking

Participants lock their tokens, which remain under their ownership. They are not lending tokens to anyone. Instead, they are committing their assets to support the security and validation of transactions on a Proof of Stake (PoS) crypto network.

In staking, the tokens, or crypto, act as collateral that qualifies the holder to participate as a validator on the blockchain. The validator maintains ownership and assumes the risk associated with network participation.

Source of rewards

The origin of returns represents another critical difference:

Fixed deposits

Interest is generated from lending activities. It is an additional money without basis, and this is riba’ (usury). Because exchanges between money and money must be of equal value, money loans must not be accompanied by any additional amount without any basis.

Staking

Rewards are derived from transaction fees paid by users making transactions on the crypto network. These fees are distributed to validators who successfully validate transactions and maintain network security. The rewards are earned through active participation in a productive service validating transactions, and securing the network.

The need for Shariah assessment

Despite these fundamental differences that distinguish staking from conventional fixed deposits, not all staking arrangements can be automatically considered Shariah compliant. Each staking opportunity requires careful Shariah assessment across multiple dimensions:

• Reward system structure
• Sources of rewards
• Activities of the ecosystem
• Token involved
• Applicable Shariah contracts

Can I stake crypto without Luno?

Yes, cryptocurrency is designed to be a decentralised system, open for any individual to participate in without relying on an organisation like a bank or a crypto exchange.

However, there are barriers to entry. If you’re not using a third party to facilitate staking, and depending on which cryptocurrency you’re staking, you might need to:

• Set up a validator node on a computer that’s kept online 24/7
• Look after your own private keys
• Manage crypto transfers to and from the node
• Create a separate wallet to receive rewards
• Have the minimum required amount to become a validator (Ethereum’s minimum is 32 ETH)
• Validate the Shariah status of the system you’re using

Luno’s role is to eliminate these barriers, so you can easily stake any amount of crypto 

How does staking with Luno work?

Luno has set up the technical infrastructure connecting to a staking service provider we’ve partnered with after careful review. Staking your crypto through Luno is quick and easy, and all you have to do is transfer crypto you want to stake into a staking wallet.

The crypto in this staking wallet is moved into a special blockchain address, known as a validator node, dedicated to verifying transactions. It can take up to several days for your crypto to become active on the node before you start earning rewards.

Rewards earned from staking will then be paid out regularly directly to your staking wallet, increasing the total amount of crypto you have staked.

You can also choose to top up your staking wallet by adding more crypto, or you can move funds out of your wallet by unstaking at any time. Both of these actions could take some time, and the time delay depends on how that blockchain was set up, which is outside of Luno’s control.

What are the benefits of staking?

As a Luno customer, you can stake your crypto over a long period of time to earn rewards on the amount staked. 

What are validators?

Every cryptocurrency has a database that stores transactions, generally referred to as a blockchain. A blockchain must safely and chronologically keep track of and record all transactions made using the cryptocurrency. This can only happen when network participants agree that each block of transactions is valid.

When you stake cryptocurrency, you become what is known as a validator. To qualify as a validator on a cryptocurrency network that uses proof of stake, validators must lock up, or stake, a certain amount of cryptocurrency as collateral.

If a validator tries anything untoward, such as pushing through a bogus transaction, the network can penalise them by destroying their stake. This is also known as “slashing”, though there are other ways in which networks can penalise rogue validators. Effectively, what this does is disincentivise participants from breaking the rules and awards them for their work in approving good transactions – ensuring that the integrity of the blockchain remains secure.

Are my funds safe?

Luno has partnered with one of the most trusted staking services providers in the industry with a track record of 99.9% uptime to date. Their validator node is monitored 24/7 with backup nodes on standby. Due to these security mechanisms, slashing very rarely occurs, but in the unlikely event that your staked crypto is slashed, our staking provider has processes in place to review and remediate slashing penalties where it is commercially reasonable to do so. We’ll communicate the steps you can follow in the very unlikely event of this ever happening.

Cryptocurrency staking can be structured in a Shariah-compliant manner, but it is not inherently compliant by default. The key differences between staking and conventional fixed deposits provide a foundation for potential Shariah compliance.

Each staking opportunity undergoes a thorough review by qualified Shariah advisors to ensure it meets the core principles and requirements of relevant Shariah contracts. This careful assessment is essential to determine whether a particular staking arrangement aligns with Islamic principles.

At Luno, our SOL, ADA & ETH staking services are certified Shariah-compliant by Sharlife Advisory and Amanie Advisors.

*Investing in cryptocurrency may result in the loss of capital. This information should not be construed as a solicitation to trade. All opinions, news, research, analysis, prices or other information is provided as general market commentary for information purposes only and is not investment advice or recommendation. Luno always advises you to obtain your own independent financial advice before investing or trading in cryptocurrency.